Indonesian group plans challenge to bid to scrap $20 bln in fuel subsidies

PALEMBANG, Indonesia, June 8 (Reuters) - Indonesia's second-largest Muslim group plans to file a lawsuit challenging a decision by President Joko Widodo to scrap $20 billion worth of government fuel subsidies in his most radical reform since taking office last October.

The action by Muhammadiyah, a nationalist movement with about 30 million members, is the next step in what it calls a "constitutional jihad" that has successfully dealt legal blows to private participation in the oil, gas and water sectors.

The group's "jihad" may seem outlandish and doomed to fail in a country where few question the free-market economy, yet its citizen activism has already overturned two laws.

The situation underscores the balance Widodo needs to strike in trying to attract much-needed foreign investment, while satisfying an electorate demanding more populist policies.

"There are so many economic policies in Indonesia going in the wrong direction," Syafruddin Anhar, head of the group's economic committee, told Reuters on the sidelines of a conference in Palembang, in South Sumatra.

"Some policies are too friendly to foreign investors, giving them a chance to take everything in Indonesia."

He gave the examples of the mining and energy industries, but did not identify specific companies.

Muhammadiyah plans to file a lawsuit in the next few months in the Constitutional Court, which is empowered to carry out constitutional reviews of legislation, challenging Widodo's decision to abandon costly gasoline subsidies for rates based on the global market price.

Widodo took the unprecedented step on subsidies at the beginning of this year, aiming to free up funds for infrastructure and farm projects.

Government officials defended their policies, but warned that the prospect of a lawsuit could alarm investors.

"It may scare investors. It may create uncertainty," the vice president's economic adviser, Wijayanto Samirin, said on the sidelines of the conference.

Last week, Muhammadiyah officials met the president and vice president to discuss the group's concerns.

Muhammadiyah, which runs thousands of schools, hospitals, and small businesses, has identified more than 100 laws it believes violate a constitutional tenet for the state to control natural resources for the benefit of all Indonesians.

In two previous campaigns, the group has shown it can force changes in government policy.

In 2012, Muhammadiyah succeeded in crimping the government's ability to sign contracts with private companies in the energy industry.

This year, in a case brought by Muhammadiyah, the constitutional court axed a rule allowing water permits to the private sector. That decision plunged into uncertainty businesses from textiles to beverage bottling. (Additional reporting by Klara Virencia in JAKARTA; Editing by Clarence Fernandez)